China economy

By Andy Rothman, Matthews Asia

Will China’s real estate market crash? No, not in my opinion. China’s residential property market is significantly softer now. But I believe there is very little risk of a crash. House prices are stabilising in China, and are likely to rise again by the second half of this year on a year-over-year basis.

But keep in mind that because of the base effect, prices are likely to fall year-on-year at a steeper rate through much of the first half of this year, leading to a growing chorus of predictions of a housing crisis. Read more

By Joel Backaler, Author of “China Goes West”

On March 22, China National Chemical Corporation (CNCC) reached an agreement with the controlling shareholders of Italian tire-maker Pirelli to move forward with a €7bn takeover. If successful, the deal will be one of the largest overseas acquisitions of a European company by a Chinese firm to date.

While CNCC may not have the global recognition of Chinese firms such as Alibaba, Huawei and Lenovo, CNCC and its chairman, Ren Jianxin, are experienced international acquirers. Ren has acquired either directly, or via government driven consolidation, 107 domestic firms and four international businesses in France, Australia and Israel. Read more

By David Mann of Standard Chartered

Much of the negativity about world growth prospects at the moment seems to stem from the absence of a credit boom in any major market and worries over the consequences of higher US interest rates for the first time since 2006.

The lack of a credit boom means that growth is more subdued than it was in the run-up to the global financial crisis.

In particular, there are fears about China’s growth prospects, given the recent bad news concerning weak credit demand, high real interest rates and tight liquidity. However, we see three reasons for at least some optimism. Read more

The second cut in China’s interest rates in three months reveals key elements in Beijing’s thinking as it tries to reconcile an economic policy agenda beset with conflicting priorities, analysts said on Monday.

The task before China requires some delicate manoeuvres. It aims to wean the country off an extraordinary debt binge (see Martin Wolf ) while keeping GDP growth fairly robust. It hopes to combat disinflationary pressures while preventing the renminbi from sliding too sharply against the US dollar. It wants to curb a dangerous slump in industrial profits without resorting to another round of investment pump-priming. It needs to keep domestic liquidity levels buoyant in spite of a surge in capital flight.  Read more

By Guonan Ma, Bruegel

The Chinese economy is simply too big to remain tied to the once useful monetary anchor of the renminbi-US dollar peg. It is time to let it go.

The Chinese renminbi depreciated 2.5 per cent against the US dollar in 2014, the largest annual fall since 2005 when Beijing timidly started loosening its tight dollar peg. Recently, the Chinese currency has repeatedly tested the weak side of its daily trading band, despite attempts by the People’s Bank of China (PBoC) to signal a steadier bilateral renminbi-US dollar rate via its daily fixing (see chart below, left panel).

What has led to the changing fortunes of the renminbi? What lies ahead for the currency in 2015? Read more

China faces a monetary policy “wall of worry” as its economy slips towards a deflationary spiral driven by structural forces that are simultaneously dragging prices lower and depressing economic growth, analysts said on Tuesday.

The important insight, the analysts said, behind a decline in consumer price inflation (CPI) to a five year low of 0.8 per cent in January was that it was caused not by isolated or temporary factors but by a confluence of mutually-reinforcing trends that will require a concerted and accelerated easing in monetary policy if China is to avoid a deflationary cliff. Read more

By Achilles Risvas, Dromeus Capital Management

Could changing tides in “carry trade” capital flows suddenly drain value from Chinese property and equities, causing the renminbi to depreciate rapidly and darken investor perceptions of China’s prospects?

Such an outcome is more likely than generally realised.

China has undeniably boomed in recent decades, thus engendering a general bias that Chinese state planners will prevail or triumph – as suggested by the more than 60 per cent run-up in the Shanghai Composite Exchange Composite Index since mid-2014. Read more

The Bric countries – minus India – embellished their growing reputation as laggards in the emerging market (EM) universe in January as manufacturing activity in Russia and China declined and Brazil turned in another subdued performance, data published on Tuesday shows.

The result is that, as a bloc, the Bric countries (Brazil, Russia, India and China) are diverging from the rest of the EM universe in manufacturing output and the trajectory of GDP growth. Other EM countries, meanwhile, are reaping the benefit of positive global demand and assuming a role as the key engines of developing world growth. Read more

Economic slowdowns in Macau and China have driven headlines recently, but a new report by the Brookings Institute ranks Macau as the top economically performing metropolitan area in the world for 2014, followed by four Chinese cities in the top 10 and 11 in the top 20.

Macau’s casino industry took a hit over the second half of 2014, due mainly to a Chinese crackdown on corruption and graft that has reduced the number of VIP high-rollers travelling to Macau from the mainland. In December, gambling revenues hit their lowest point since 2011, and for the whole year, the industry recorded its first ever year-on-year decline – much to the dismay of casino and junket operators. Read more

By Robert Moffatt, Neuberger Berman

Throughout much of the world, auto market prospects appear sluggish. In the US, auto sales are moving back to normalised replacement demand levels, implying slowing growth. In Europe, sales are being held back by a choppy economic recovery. China, in our view, presents a different story. Despite near-term concerns about the country’s slowing GDP growth and slipping consumer confidence, we are bullish on the long-term growth prospects of Chinese autos.

The Chinese auto market went through a rapid growth spurt from 2005-2010, growing nearly six-fold in six years, from 2.5m units in 2004 to 13.75m units in 2010. This unprecedented 35 per cent compounded annual growth rate has since slowed to roughly 9 per cent, but with nearly 18m cars sold in 2013, China has displaced both the U.S. and Western Europe as the world’s largest auto market (see chart below). Read more

By Vikas Pota, Varkey Foundation

By 2030, the economies of India and China together may contribute 65 per cent of global GDP and be home to the majority of the world’s working age population. India alone will possess the world’s biggest pool of potential employees.

But the giddy predictions of future growth seem more fragile when it is considered that this potential labour force is dependent on education systems that often fail to teach basic skills.

India has the largest number of illiterate adults of any country globally. Teacher absenteeism is the third highest in the world, and many teachers lack basic training. Some 12.8m young Indians enter the work force each year and, without adequate skills, will often struggle to find employment. Shanghai leads the rankings done by Pisa, the Programme for International Student Assessment, and has become a poster-child for education ministries around the word. But in rural China, many students still do not finish secondary school. Read more

By Frederic Neumann, HSBC

Things in China look a bit soggy. True, growth a touch above 7 per cent is nothing to sneer at. But it’s down sharply from days past. And as the Mainland matures, those double-digit growth rates seem even less likely to return. Where, then, to look for the next story of hyper-charged growth?

Plenty of promising places around: Sri Lanka will probably grow faster than China this year, and so could the Philippines, Vietnam and Bangladesh at some point. But, from a global perspective, these will hardly make a dent; certainly, commodity markets will not get terribly excited about accelerating demand from these markets. Read more

China’s “big four” state banks are losing share in the country’s fast-growing retail banking market as customers embrace a more sophisticated array of products and swell a burgeoning fashion for digital banking, according to a survey of savers conducted by McKinsey, the consultancy.

The main beneficiary from the slide of the “big four” – the Agricultural Bank of China, the Industrial and Commercial Bank of China, the Bank of China and the China Construction Bank – have been the joint-stock commercial banks, which include institutions such as China Merchants Bank, China Everbright Bank and CITIC Bank. Read more

The decrease in mineral exports that has been hurting growth and investment in Peru, the world’s third largest copper producer, appears to have taken a heavy toll on economic growth, with President Ollanta Humala saying in a radio interview this week that 2014 growth eased to somewhere between 2.6 and 2.7 per cent.

This prediction, if confirmed by official statistics, would mark the Andean country’s slowest GDP growth rate in over five years. It would also represent a sharp slowdown from 2013, when the economy expanded at 5.8 per cent. Read more

By Li Hejun, China New Energy Chamber of Commerce and Hanergy Holding Group

Almost 200 governments met in Peru this month to hammer out a first draft of a global deal to cut emissions, ahead of a new round of climate talks next year in Paris. If the world is to arrest climate change, global economies need to embrace renewable energy. Those looking for a model of how this might be done should consider a possibly surprising source: China.

It has been little noticed by the outside world, but in China a technological revolution that will result in huge gains in efficiency and new applications for renewable energy has already begun. Read more

By Rafael Halpin, China Confidential

At the start of his premiership, Li Keqiang drew on an ancient Chinese proverb to explain the task ahead. A Chinese warrior, having been bitten by a snake, cuts off his hand in order to save his body. China’s reform process will be “very painful and even feel like cutting one’s wrist”, Li warned.

Pain has certainly been part of 2014 for the Chinese economy. To a large extent, it has been self-inflicted. Measures to deleverage the shadow financing system, for example, led to a sharp slowdown in credit, which in turn contributed to a drop in home sales. This has resulted in slower growth in industrial output, as well as weaker consumer purchases of cars and white goods. Meanwhile, anti-corruption campaigns have hit spending on luxury goods and services and led to delays in the approval of new projects by local officials. Read more

By Andy Rothman, Matthews Asia

After two decades of 10 per cent GDP growth, followed by average growth of over 8 per cent, conventional wisdom is that China is on the verge of collapse. But that wisdom is based largely on many misunderstandings.

Let’s start with the consensus that China’s residential property market is about to replicate the U.S. housing crisis. But China has avoided most of the U.S. traps. For example, homeowner leverage is far lower in China than it was in the U.S. during the run-up to the crisis. By 2006, the National Association of Realtors reported that the median cash down payment for first-time homebuyers in the U.S. was only 2 per cent of the purchase price. In China, the minimum down payment is 30 per cent. Read more

When the IMF announced this year that China’s economy had overtaken the US economy at purchasing power parity, there was some skepticism about the usefulness of PPP calculations and widespread amazement about the speed at which China had made this transformation.

Both themes carry over in a note on Friday from HSBC, which examines the data more closely to conclude that, even after switching variables, the size and importance of the Chinese economy cannot be denied. Read more

By Hayden Briscoe, Shamaila Khan and Jenny Zeng, AllianceBernstein

Based on insights from our team’s recent trip to China, we noted that the country is likely headed for a long economic landing. What does that mean for its infrastructure and commodity sectors? Read more